Viewpoint / Cellular earnings

Government officials use 22,000 cell phones, making it the biggest account in Israel. The procurement department put up a dynamic auction. Within seven hours, Israel's four cellular companies had streamed in no less than 300 offers.

"Pizzas? Who had time to eat?" groused Avi Dor, the manager of the new government procurement department. "We spent seven hours tensely tracking the screens," he said, describing the tender for cellular services to the government.

Government officials use 22,000 cell phones, making it the biggest account in Israel. The procurement department put up a dynamic auction. Within seven hours, Israel's four cellular companies had streamed in no less than 300 offers.

The top position in the list changed no less than 100 times. Each of the cellular carriers reached that coveted position at least once and by the end of the day the winner was: Pelephone Communications. It has supplied cellular communications service to the government until now, and retains its crown for the next seven years.

To sum up, Dor managed to slash expected government expenditure on cellular by 20 percent. The government spent NIS 62 million on cellular communications last year. The same calls this year will cost NIS 13 million less. Dor views the savings as a tremendous achievement, especially as he had been warned that the dynamic auction would wind up costing the government more, not less.

Why? Because the services Pelephone had granted to the government had been dirt cheap, compared with what regular consumers pay. In fact, Pelephone provided most of its services for free. A call between a government Pelephone user and any private addressee, whether a fellow Pelephone subscriber or not, was free. The company settled for collecting 3 agorot per minute on calls between two government cells, and interconnect fees of 0.9 agorot a minute from a government cell phone to a Bezeq line.

In fact, out of the NIS 62 million the government paid for cellular service in 2004, most evidently went to the other cellular companies and to Bezeq, which get call completion fees when a government official calls somebody using their networks. Pelephone got a mere fraction of the amount.

Under the new contract, its revenue will shrink even more. Dor demanded and won a fixed airtime price. "I don't care about call completion charges," he said, demanding that the communications carriers absorb the costs of transfers to them or Bezeq. They agreed and Pelephone's final offer was 6.6 agorot per airtime minute, including call completion, and 6 agorot per minute for calls to a Bezeq user.

Two things show just how low is that price. One is that call completion tariffs run at 32 agorot, so the government is paying just a fifth of what Pelephone has to pay the other cellular carriers. Two, the call completion charge to Bezeq is 6.7 agorot, so Pelephone is charging less than the price Bezeq collects. It is, in essence, subsidizing Bezeq.

The company in second place had not asked for much more. Ergo, there was at least one more company that did not hesitate to charge less than cost.

What is going on? Have the cellular carriers gone mad? Do they want the government custom, even at a loss?

The ego of the managements may have addled their common corporate sense.

Or maybe not. Maybe Pelephone Communications does stand to profit, not in the form of money, which it will be losing on the deal, but in terms of payments from Bezeq and other cellular users calling the government officials. Call completion charges to 22,000 government officials can make up the difference and then some.

The conclusion is clear. A call completion charge of 32 agorot is a gold mine, enough to offset the impressive losses Pelephone will be racking up on outgoing calls from the 22,000 officials. Ehud Olmert should not have capitulated to the cellular companies, he should not have agreed to moderate the cut in call completion charges. The companies are still waxing fat at our expense.